Following a brief stint as the top property market in Australia, the Melbourne market is slowing

It’s official: Melbourne is on the slow slide down the growth chart.

In the past 12 months, capital growth across the city of Melbourne was 10.1%, reports CoreLogic – down from an annual growth rate of 14.2% in September 2015. Auction listings also decreased, which is believed to be a reflection of a steadying market.

“A lot of the demand and the supply in these suburbs were brought forward last year,” says Andrew Wilson, chief economist at Domain Group.

“The dramatic drop in stock levels today is showing the difference between the boom market last year, when a lot of action came into the market in late autumn and encouraged sellers, and the steady market we’re seeing this year.”

Strong population growth of around 2% per annum and a relatively strong economy, which has been creating more jobs, have underpinned the Melbourne property market, reports Michael Yardney, director of Metropole Property Strategists.

“The economy is fuelled by a lower dollar and interest rates,” he says. “Property prices are more affordable than in Sydney, yet our incomes are comparable.”

Like Sydney, these positive factors have contributed to enhanced interstate and overseas migration.

First home buyers more active
First home buyer activity has been rising and was recorded at 3.8% in the month of May, based on the most recent ABS data.

With an official interest rate cut flooding through to mortgage holders in May, the first home buyer share of Melbourne’s property market is likely to grow as the year marches on, particularly if further rate cuts are delivered.

Sydney investors are also turning to Melbourne as an inexpensive investment compared to properties in their home state. For some buyers, apartments in Melbourne have much better capital growth potential and higher yields, with purchasing price points that are far more accessible than in the Harbour City.

Yardney indicates that apartments with renovation potential established in the inner-eastern and southeastern areas of the metro are ideal investments, because renovations can add considerable value. Another good option in the present market is the inner- or middle-ring suburban house, which can also be either renovated or developed.

“If your budget allows, buying a villa unit or a small house in the right suburb should deliver strong capital growth over the next few years,” Yardney says.

Homes and apartments in good locations within Melbourne’s middle-ring suburbs are limited. With demand being greater than supply in these areas, auction clearance rates remain reasonably high and prices are staying strong.

Moreover, vacancy rates continue to dip, especially those of units, although vacancy rates of houses are still below 2%, Wilson reported in a Domain.com.au article in May. Thus, competition is intense for rentals and rents are shooting up.

The massive Melbourne risk: oversupply
Although it’s got a lot going for it, Melbourne’s market also has a dark side: the considerable stock of new apartments in the CBD and the inner-city suburbs, which is expected to limit capital gains and rental growth. More units are in the process of development, from Docklands to Werribee.

“With a significant oversupply of new and off-the-plan apartments, and house and land packages in the outer suburbs, it is critical to steer clear of these submarkets,” Yardney states.

Paul Glossop, founder and director of Pure Property Investment, predicts that the oversupply will stunt yields in the next three to five years. Growth is expected to be suburb-specific as prices in general settle due to this issue.

“Demand will continue; however, supply is the question mark in the coming years,” Glossop says. On the whole, he recommends that buyers focus on “developed areas with good facilities given the short-term issues from the inner city through to the suburbs”.

In terms of cash flow, the house market in rural Ouyen tops the Victorian market at $75 positive per week. This suburb reported 5% growth over the past 12 months and a very high rental yield of 10%, according to CoreLogic. Property prices are also very low, contributing to Ouyen’s attractiveness as an investment.

The affordable unit market in Kennington, a suburb of Bendigo, experienced a resurgence in the same period, with 19% growth, while sustaining positive cash flow. The introduction of investors from Melbourne into Bendigo’s property market may increase prices and competition.

“Melbourne is a tough market,” Glossop confirms.

That said, he believes the cash flow wave in apartments situated away from the inner city can still be sustained for the next three or four years.

SUBURB TO WATCHEpping: Melbourne suburb in development

The suburb of Epping is a beautiful spot to the north of Melbourne, with several large hills providing excellent views of the city. This, along with its proximity to the CBD and affordable property prices, makes it an appealing option for buyers and tenants alike.

“It is quite affordable to own or rent here when compared to suburbs with similar infrastructure,” says Robert Ozzimo, director and auctioneer at Harcourts Epping/Wollert.

The vacancy rate dropped 0.8% over the previous year to a reasonable 1.5%, indicating increasing tenant demand. The rental yield hovers at around 4.5–5%, thereby generating good returns for investors.

Aside from being home to the Pacific Epping Shopping Centre, Epping also has several medical centres. There are over 20 parks and reserves as well. The suburb is an educational hub, as the home of St Monica’s College, one of the largest Catholic high schools in the country, and the Northern Melbourne Institute of TAFE on Dalton Road, which is well known for its training courses in agriculture. The Green Skills Centre teaches environment-friendly practices.

The Hume Highway is accessible from Cooper Street, providing access to the city and airport.

“The federal government is also about to consider a proposal that will see the Hume freeway accessible from a new interchange at O’Herns Road,” Ozzimo adds. “It will provide even more convenience for residents, particularly those residing in the new estates in Epping’s north.”

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